Personal Finance: Mind the trap when rates fall

Borrowers welcome a cut in interest rates but savers should hunt for guarantees, says Clifford German

FALLING interest rates are only good news for borrowers. These days, rate cuts make savers doubly nervous, not just because their investment income is shrinking. How can they be sure they are getting a fair deal? The competition to offer "best buys" is intense: this week's "market leader" can quickly be overtaken by competitors and few people have the time or opportunities to keep switching their money from one account to another.

Banks and building societies have also been known to take advantage of investors by selectively reducing the interest on accounts that they are no longer actively promoting, leaving unwary savers even more out- of-pocket.

Banks and building societies both subscribe to the Banking Code, which commits them to advertise changing interest rates in the media, and in the branches, but not everyone reads the papers and not everyone regularly does their business in the branch these days.

A new version of the code comes into operation at the end of March next year, but it will still not be compulsory for them to notify savers individually and, to be fair to them, the postal system would probably collapse under the sheer weight of mail if every account holder had to be notified by post every time rates changed.

In the meantime, however, a number of banks and building societies do now offer "guaranteed" rates of interest. Rates will still fluctuate, and they are not guaranteed to be the best rates currently available, but they will remain linked to a published benchmark rate, usually base rate, giving savers some sort of "guarantee" that they are not being cheated.

"Guarantees" come in two different types, those which track a well-known yardstick such as base rate or a money market rate like LIBOR, and those which offer an average of either the best or the biggest high street operators and recalculate their rates each month. Neither type of account guarantees the best rate, and those linked to rival rates by definition will be a touch below the best available at any one time. But at least there are no traps for the unwary or those too busy to keep close tabs on changing rates.

Close Brothers introduced its pioneering Crystal Account in 1995, promising to pay within a half per cent of base rate at a time when rates were actually rising. Skipton building society's protection bond offers a fixed rate until March 2000 when it switches to base rate. Notting- ham Imperial building society guarantees to pay half per cent above base rate until the millennium, although this product may not be on offer much longer. Egg, the Prudential's new account, promises to pay 8 per cent until the end of this year, then at least 0.5 per cent above base rate next year, followed by base rate until January 2001.

Virgin Direct's deposit account pays 1 per cent under base rate on amounts as low as pounds 1 and the rate will stay at 6.25 per cent for the time being. Other deposit accounts offer rates linked to the average of leading competitors. Saga guarantees its savers that they will receive the average of 10 leading high street savings bodies. Its current rate on pounds 5,000 is 6.55 per cent, which could go down to just over 6 per cent next month. FirstActive (0800 558844) is currently paying 7.16 per cent on pounds 1,000. Norwich Union's index tracker account is currently only available to customers with maturing Norwich Union policies, but is expected to go on offer to the wider public next month.